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For decades, making a payment online was as simple as entering a few numbers: a card number, an expiration date and a name. Then came card verification values and additional security layers. Now, depending on where you shop, your internet protocol address, device ID, and even behavioral data might be used to verify transactions.

Research from NordVPN found that stolen payment details can be purchased illegally for as little as $10. These added security measures attempt to combat fraud and secure transactions as much as possible. Payment processors know fraudsters are unlikely to have access to all the data required to impersonate a genuine customer.

The U.S. has some of the highest rates of payment fraud globally. Americans lost $12.2 billion to fraud in 2024 — a 38% increase from the previous year — according to the Federal Trade Commission. E-commerce is a major target. With digital shopping continuing to grow, businesses need stronger fraud prevention tools that don’t compromise customer experience.

With fraudsters becoming increasingly sophisticated, payment providers have responded by requiring more data to authenticate transactions. Consequently, the more data, the better the fraud prevention. Yet, this also increases risk — sharing large amounts of personal data online creates more opportunities for cybercriminals to intercept and misuse sensitive information.

What if there were a way to make stolen payment details useless to hackers? That’s where tokenization comes in, offering a more secure and seamless way to protect payments.

How Tokenization Works

Tokenization serves to protect sensitive information. In payment security, tokenization replaces a card’s 16-digit number with a unique, randomly generated series of characters called a "token." As opposed to the original card number, a token is not useful if illegally obtained or obtained by hackers. This is because it can only be decoded within the payment network that issued it.

Though this technology was not recently developed, its role and influence has expanded dramatically. Mastercard introduced its tokenization service in 2014, securing billions of transactions annually. Today, major card networks, payment processors and merchants are increasingly adopting tokenization as a security standard.

As a customer enters card details on a website or adds a card to a digital wallet, the payment network generates a token. The token replaces the actual card number in storage and during transactions.

For instance, when you make a payment with your card details on an online store/site, that site does not store your actual card number — instead, it stores the token. When you check out, the token is used to process the payment, and behind the scenes, the payment network securely maps it to the original card details.

The Advantages of Tokenization

Tokenization offers multiple advantages for consumers and merchants alike:

Enhanced security: Merchants never store actual card numbers, reducing the risk of breaches. Even if a hacker gains access to a database, the stolen tokens are useless outside the payment network.

Lower fraud rates: Studies show that network tokenization reduces fraud rates by up to 26% while improving transaction approval rates.

Seamless customer experience: If a card expires or is replaced, network tokens update automatically, eliminating the need for customers to manually update payment information.

Easier compliance: Businesses using tokenization reduce their burden under PCI DSS (Payment Card Industry Data Security Standards), as they are not storing raw card data.

Article provided by thefinancialbrand.com. Written by Anne Willem de Vries.